When CEOs ask finance executives how profits look for the current quarter, the response is likely to be how much do you want?

When stock valuations rise, executives profit greatly, giving them an incentive to elevate them artificially.

Investopedia: “Worse still, the incentive to keep the share price motoring upward so that options will stay in the money encourages executives to focus exclusively on the next quarter and ignore shareholders’ longer-term interests.”

“Options can even prompt top managers to manipulate the numbers to make sure the short-term targets are met.”

On Monday, Bloomberg News headlined: “The No. 1 Source of Stock Demand Is a Goner, for Years to Come,” saying:

According to Sanford Bernstein (SF), the biggest driver of higher stock prices for many years is now sidelined because of current economic and market conditions that negatively affect bottom line performance.

Because sales and profits are down, companies are less able to issue high-yield debt that enables them to buy back stock that inflates valuations.

SF believes buybacks could become “socially unacceptable” though it’s too soon to tell.

“For at least several years, buybacks will be severely curtailed,” SF predicts, adding:

Stocks will “unlikely return to their pre-crisis valuation multiples” any time soon.

For at least the past five years, buybacks added up to 1.5% to earnings-per-share growth, boosting their price that’s unrelated to true value based on performance.

Further, “(a)s governments take a larger role in economies, this could turn the tide away from shareholders-first views of economies for some time.”

“Government’s role in financial markets cannot just be packed back into the box once this is all over.”

“The absence of risk-free instruments that can deliver positive real return and at least a risk of higher inflation further bolster the case for gold.”

Buybacks were the key driver behind rising markets since the 2008-09 financial crisis.

According to S&P Dow Jones Indices, around $730 billion were spent on buybacks last year alone. In 2018, a record $806 billion was spent, fueled by the great 2017 GOP tax cut heist.

Big business got hundreds of billions of dollars in free money – used mostly for stock buybacks and generous handouts to executives.

Workers got shortchanged. Thousands got pink slips the past two years. Now it’s millions, while handouts to business is elevating the federal deficit exponentially.

The corporate bailout enacted last month is another restraint on buybacks that could be short-or-longer-term.

In return for free government money, corporate recipients are not to use it for buybacks or dividends until one year after borrowed amounts are repaid or written off, the latter option the most likely.

Whether recipients intend following this stipulation is another matter entirely. Hindsight will explain best.

Companies hurt by downturn will be forced to use government and Fed money to stave off bankruptcies and possible shutdowns in some cases.

About the author:

Stephen Lendman lives in Chicago. He can be reached at [email protected]
His new book as editor and contributor is titled "Flashpoint in Ukraine: US Drive for Hegemony Risks WW III."
http://www.claritypress.com/LendmanIII.html
Visit his blog site at sjlendman.blogspot.com.
Listen to cutting-edge discussions with distinguished guests on the Progressive Radio News Hour on the Progressive Radio Network. It airs three times weekly: live on Sundays at 1PM Central time plus two prerecorded archived programs.

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